I was thinking a lot about innovation today. Part of it was inspired by recalling an exercise in TRIUM's corporate finance class, taught by the amazingly well-organized Paul Brown, in which we had to match up twenty different income statements with companies from twenty different sectors. The exercise showed how one can develop an instinct to identify the "right" financial characteristics for a given sector.

In the context of innovation, though, part of a company's job is to ask, "How can I change the economics of my sector to win more opportunity, or limit my risk, than my competitors can?" The degree of disruption is measured in part by the degree to which the economics can change. (This is why Apple should not discount. As soon as it builds products that must be discounted to sell, it is on a slippery slope to have economics "just like" their competitors.) Think Blockbuster vs Netflix. Netflix competed on customer analytics: Tell us what movies you like and we'll tell you what you can rent that you're likely to enjoy. They didn't have retail outlets. So, while you couldn't just walk in and get a video on the night you wanted to see it, you could have a queue of videos on the way that would be ready for you "reasonably quickly" which you chose beforehand. It changed the "satisficing" conditions of Blockbuster to the "delighting" conditions of Netflix -- without the need for retail storefronts.

But the argument can be made that Netflix's innovation was not just economics, but the combination of economics with customer analytics. Which is more important to innovation?

In fact, you may be able to exercise your innovation around a three legged stool: Finance innovation, process innovation, and customer innovation. Can any one of those give you a significant, disruptive model? Or, like Netflix, do you have to look at all three, and combine them in a nuanced way to create that disruption?

In any event, the final analysis is that innovation doesn't matter if it's not adopted. So, you must have that third leg: Why does this new idea really matter to the customer?